UK monetary policy will need to be tightened more and at a faster pace than markets expect to bring inflation back to its target range, a member of the Bank of England’s monetary policy committee warned on Thursday.
Andrew Sentance, an external member of the MPC who has been urging modest rate rises since last summer, said that the medium-term view – generally presumed to be a two-year horizon – of his fellow MPC members revealed in the quarterly inflation report this week was “over optimistic”. Currently, the futures market for UK interest rates suggests that three rate rises are expected by this time next year, bringing the Bank rate to 1.25 per cent, from its current record low of 0.5 per cent. Read more
Britain’s economy has turned out better than expected a year ago, when rate cuts were being made and quantitative easing extended. This from Bank of England MPC member Andrew Sentance, who voted last month for a 25bp rise in the base rate.
Gently does it, argues Mr Sentance. In a speech in Reading today, he sets out the case for a gradual increase in the base rate. But he is not in favour of a rate ‘hike’: the word implies suddenness but the increase must be gradual. For the same reason, he’s not keen on the word ‘tightening’ to describe his suggestion: Mr Sentance wants to see a gradual removal of loose monetary policies, and it will take a long time before the base rate will be called ‘tight’.
There are four ways in which the outlook is brighter than expected a year ago, argues Mr Sentance. “The world economy has bounced back, demand is recovering in the UK, there is less spare capacity than we feared and inflation has been higher.” But monetary policy must be forward looking, so these factors alone do not add up to a “compelling case for change”. The question, he says, is how the growth and inflation outlooks have changed. Read more
Andrew Sentance hinted today that the UK central bank will tighten policy, saying that while current conditions persist, it “will be difficult for the MPC to keep inflation on target”.
“Through the recession, the MPC was right to relax monetary policy aggressively to provide support for a recovery that is now emerging. But as the recovery develops, the economic situation will change and the MPC must be ready to adapt its policies to the changing economic situation Read more